IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "L", MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA No.276/Mum/2012 Assessment Year : 2008-09 Sunil V. Motiani Income tax Officer 101 Victoria-10th Floor (International Taxation)-4(1) Sarojini Road Scindia House, Ballard Estate Vs. Santacruz West Mumbai-400 038. Mumbai-400 054. PAN No.ABBPM 7721 Q (Appellant) (Respondent) Appellant by : Shri Rakesh K. Milwani Respondent by : Ms. Neerja Pradhan Date of hearing : 21.02.2013 Date of Pronouncement : 27.02.2013 ORDER
PER RAJENDRA SINGH, AM:
This appeal by the assessee is directed against the order dated 14.11.2011 of CIT(A) for the assessment year 2008-09. Though the assessee has raised three grounds of appeal, the only effective issue is whether the assessee is liable to pay education cess and surcharge in addition to the tax @ 12.5% payable on interest income under the provisions of Double Taxation Avoidance Agreement (DTAA).
2. The assessee is a non-resident based in UAE. During the relevant year the assessee had received gross interest income of Rs.7,55,187/- from the partnership firms in India in which the assessee was partner. The assessee was governed by the provisions of DTAA between India and UAE which had specific provisions of taxation of interest income. The AO in addition to taxing the interest income at the rate prescribed, also levied education cess and surcharge.2 ITA No.276/M/12
AY .08-09 2.1 The assessee disputed the decision of AO and submitted before CIT(A) that since there was a cap of 12.5% on the rate of tax under DTAA the said tax rate included surcharge also. CIT(A) however did not accept the contention raised. He referred to the judgment of Hon'ble High Court of Uttarakhand in the case of Arthusa Offshore Co. (216 CTR 86) in which it was held that surcharge was payable by the assessee in addition to tax rate of 12.5% as per DTAA. CIT(A) also observed that the interest income from the partnership firm was assessable as income from business and profession and therefore held that the assessee was not eligible for the preferential tax rate applicable in case of interest income as per DTAA. CIT(A) therefore confirmed the order of AO aggrieved by which the assessee is in appeal before the Tribunal.
3. Before us, the ld. AR reiterated the submissions made before the lower authorities and pointed out that under the provisions of Article-11(2), the interest income can be taxed in the contracting State in which it has arisen according to the law of that state and if recipient is beneficial owner of interest, tax so charged shall not exceed 5% of gross interest if the interest is paid by the bank and in other cases 12.5% of the gross interest. It was pointed out that Article 2(2)(b) clearly provides that income tax included any surcharge thereon and, therefore, tax @ 12.5% mentioned in Article 11(2) included surcharge also. It was further submitted that the nature of education cess was same as surcharge and therefore both education cess and surcharge were included in the tax leviable at 12.5%. The ld. AR referred to the decision of the Tribunal in the case of DIC Asia Pacific Pte Ltd. vs. ADIT (Intl Txn-1) in ITA No.1458/Kol/2011 in support of the plea. It was also held in the said case that since surcharge was included in tax rate of 12.5% no further levy of education cess could be made. The ld. AR distinguished the judgment of Hon'ble High Court of Uttarakhand in case of Arthusa Offshore Co. (supra), relied upon by the ld. DR on the ground that the said judgment related to payment of tax under Article-14(2) of DTAA between India and USA and the High Court was not concerned with the interpretation of the Article-11 relating to taxation of interest.3 ITA No.276/M/12
AY .08-09 3.1 The ld. DR on the other hand supported the orders of authorities below and placed reliance on the judgment of Hon'ble High Court of Uttarakhand in the case of Arthusa Offshore Co. (supra). She also referred to the judgment of the Authorities of Advance Ruling in case of Airports Authoritiy of India, in RE (299 ITR 102) (AAR) in which it has been held that in addition to tax payable @ 10%, surcharge was also payable. The ld. DR further submitted that interest income was assessable as business income and therefore, it had to be taxed at normal rate under the treaty since the assessee was having PE in India and Article-11 could not be applied.
5. We have perused the records and considered the matter carefully. There is no dispute that the assessee is a non resident based in UAE. There is also no dispute that the assessee had received gross interest of Rs.7,55,187/- from the Indian firms in which he was a partner. The interest income is no doubt taxable as the same had arisen from the sources in India. However there is Double Taxation Avoidance Agreement (DTAA) between India and UAE and, therefore, tax has to be computed under the provisions of DTAA which is beneficial to the assessee. There are specific Articles in DTAA dealing with taxation of income under different heads. The business profit is governed by Article-7 whereas interest income by Article-11. Under para-7 of Article-7 where business profit includes items of income which are dealt with separately in any other Article of the agreement, provisions of those Articles should not be affected by the provisions of this Article. In other words, in case there is provision for dealing with a particular type of income, such type of income has to be dealt with by those provisions. Therefore, though interest income may have been assessed as business income, there being specific Article to deal with interest income i.e. Article-11, taxation of interest will be governed by the said Article-11. Secondly interest income may be taxed in contracting State in which it arises, according to law of that State but if the recipient is beneficial owner of interest, tax so charged shall not exceed 5% of gross interest if the interest is received from bank and in other cases 12.5% of gross amount of interest. In this case, the assessee is the beneficial owner of interest and tax charged cannot exceed 12.5% of gross interest. Tax has been defined in Article-2(2)(b) as per which income tax included 4 ITA No.276/M/12 AY .08-09 surcharge. Therefore, tax referred to in Article 11(2) @ 12.5% also includes surcharge. Further, nature of education cess and surcharge being same as held by the Tribunal in the case of DIC Asia Pacific Pte Ltd.(supra), in our view education cess and surcharge cannot be levied separately and will be included in tax rate of 12.5%. The judgment of Hon'ble High Court of Uttarakhand in the case of Arthusa Offshore Co. (supra), is not applicable to the facts of the present case as the Hon'ble High Court was concerned with taxability of income under Article 14(2) of the DTA between India and USA. The Hon'ble High Court was not concerned with interpretation of tax payable on interest income under DTAA. The judgment of AAR in the case of Airports Authoritiy of India, IN RE (supra), is also distinguishable as in that the court was concerned with taxability of business income and it was held that under Article 5(3) of DTAA with USA, preparatory and auxiliary type of work was excluded from the purview of PE and therefore, there being no PE it was held that income from software maintenance was liable to be taxed in India. The high Court was not concerned with taxability of interest income as per the treaty.
5.1 In view of the fore-going discussion, we hold that tax payable @ 12.5% under Article 11(2) of FTAA is inclusive of surcharge and education cess. We, therefore, set aside the order of CIT(A) and allow the claim of the assessee.
6. In the result the appeal of the assessee is allowed.
Order pronounced in the open court on 27/02/2013.
Sd/- Sd/- ( VIJAY PAL RAO) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 27/02/2013. Jv. 5 ITA No.276/M/12 AY .08-09 Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT(A) Concerned, Mumbai The DR " " Bench True Copy By Order Dy/Asstt. Registrar, ITAT, Mumbai.